the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search


Submit Your Paper

In Rememberance: World Trade Center (WTC)

doi> search: A or B

Export citation to:
- Text (plain)
- BibTeX

Intensity Gamma: A New Approach to Pricing Portfolio Credit Derivatives

by Mark Joshi of the Royal Bank of Scotland, and
Alan Stacey of the Royal Bank of Scotland

May 11, 2005

Abstract: We develop a completely new model for correlation of credit defaults based on a financially intuitive concept of business time similar to that in the Variance Gamma model for stock price evolution. Solving a simple equation calibrates each name to its credit spread curve and we show that the overall model can be calibrated to the market base correlation curve of a tranched CDO index. Once this calibration is performed, obtaining consistent arbitrage-free prices for non-standard tranches, products based on different underlying names and even more exotic products such as CDO 2 is straightforward and rapid.

Keywords: CDO, correlation smile, gamma process, CDO-squared.

Published in: RISK, Vol. 19, No. 9, (September 2006), pp. 50-55.

Books Referenced in this paper:  (what is this?)

Download paper (135K PDF) 12 pages